What Happened To Negative Gearing?

6th of July, 2018

I’m sure you’ve heard the news that Trumpy and the Rocket Man are now besties.

The media has been stuffed full of their historic meeting that took place in Singapore, where together they tucked into their prawn cocktails and mango kerabu served with fresh octopus and a honey and lime dressing ….

Oh, the highlife some get to live!

And yet just a few weeks before that we were fixated on the Royal Wedding – which has been all but forgotten.

The news cycle is lightning fast these days.

So, it’s easy to forget that not long ago, Treasurer Scott Morrison (on behalf of the Turnbull Government) presented to the House of Representatives, the 2018 May Budget.

Do you even remember what was announced Budget night?

I’m sorry to challenge your long-term memory, but I’m hoping that you can think back to the Pre-Budget chatter, which, if I remember correctly, was ALL about the Removal of Negative Gearing and Housing Affordability.

It divided the country right down the middle – those championing its elimination and for the idle rich to pay their fair dues verses those who argued removal would send rents sky high and prices who knows where!

A Melbourne University paper, “Negative Gearing and Welfare: A Quantitative Study for the Australian Housing Market (November 2017)”,  was presented to Reserve Bank of Australia and told us that nearly 75% of Australian households will be better off if Negative Gearing was ditched:

“The welfare analysis suggests that eliminating negative gearing would lead to an overall welfare gain of 1.5 percent for the Australian economy in which 76 percent of households become better off. However, the welfare effects are heterogeneous across different households. Renters and owner-occupiers are winners, but landlords, especially young high earning landlords, lose.”

And what about when ScoMo (Scott Morrison) was caught lying – he said that removal of Negative Gearing would “smash” Australia’s housing market when in actual fact his own department documents revealed that Labour’s Negative Gearing overhaul might cause “some downward pressure” on home prices.

Darryl Dixon confidently told us in the Sydney Morning Herald to “Prepare for changes to negative gearing and capital gains tax” pre-budget.

In March 2018, the Australian Housing & Urban Research Institute (AHURI) told us that $1.7 billion could be saved each year by excluding wealthy property investors from claiming hefty tax deductions.

Even the Reserve Bank of Australia Governor Philip Lowe got in on the act (February 2018) criticising some of the tax incentives for property investors, saying changes to Capital Gains Tax (CGT) & Negative Gearing would help remove some of the “heat” from the market that has worsened housing affordability.

So, does anyone remember what actually happened Budget Night?

Landlords got a MASSIVE Windfall

See rather than removing Negative Gearing or changing the current CGT rules, the Government took the extraordinary steps of announcing an extra $24.5 billion worth of transport improvements that are to be rolled out as part of the Government’s $75 billion ten-year infrastructure plan.

According to the budget papers, for every dollar the federal government invests on infrastructure, a return of $4 will be delivered to the economy. So, on the Government’s own figures of $75 billion, 4 times this is a WHOPPING $300 billion will be added via productivity gains to the Australian Economy.

$300 billion in productivity gains to be capitalised back into land prices.

This has bestowed a MASSIVE windfall on landlords and ensures that the cycle perpetuates.

“The government has a role to provide infrastructure where it leads to net benefits for businesses and communities and where there are barriers that prevent individuals or businesses from investing themselves…… Public investment, well targeted and efficiently delivered, supports productivity.” the 2018 Budget papers said.

It’s also interesting to note that the early surplus budget target will continue to provide support for the country’s AAA credit rating, which in turn is likely to please the bond market. This should help ensure Australia continues to enjoy historically low interest rates with which we can continue to buy speculative assets.

Each cycle is “Same, Same, but different” ensuring that the cycle is perpetuated, and landlords are rewarded. It’s to our advantage that most just don’t have the attention span to even realise what has just happened.

Let’s get started

If you want to avoid the mistakes of not understanding the dangers of investing without an understanding of the Economic Cycle, then why not have a chat to us about how we can help?

You have nothing to lose except a few minutes of your time and everything to gain.

So… let’s get started.

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